Your 7-step guide to conquering debt

By TaxAct

A 2019 study found that the average American carries about $29,800 in personal debt, excluding home mortgages. Those high debt balances, when left unmanaged, have a tendency to escalate quickly, making repayment feel unmanageable and sparking stress throughout our lives.

But you can take back control, and you can start today. Use this step-by-step plan to launch your debt-free journey. It’s simple, streamlined, and designed to help you tackle your debt, once and for all.

Make this the year you’re done with debt.

 

1.)    Know what you owe

List all debt. That means everything: student loans, credit cards, personal loans, lines of credit, medical bills, car payments. Once you have that magic number, you’ll have a better idea of how long it will take to pay down that balance.

Use this opportunity to also examine the behaviors that built your debts. Did you need a 60K car, or would a 20K car have worked just as well? Why did you run up that line of credit? How many streaming services are too many? If those choices aren’t in line with your goals, make different ones as you move forward. 

 

2.)    Create a budget

Getting out of debt starts with having a plan. A good budget lets you fine tune — or completely crank down the dial — on your spending and saving. Budgeting apps — many free — are available in a tap, so find one that’s right for you. Here are a few options:

  • Mint – Free, robust and built with an intuitive interface, Mint is as hardworking as it is popular. Simple, color-coded categories give you at-a-glance views of your progress, so goals are always top of mind.

 

  • EveryDollar – Need a tough-love budget? Dave Ramsey’s app assigns each dollar of your paycheck a purpose, so you commit before you spend. Free and paid versions are available.

 

  • Goodbudget — Budgeting with a partner? This app helps you synch “digital envelopes” across multiple devices, so you’re always on the same page. There’s a free plan and a beefed-up Plus option.

 

3.)    Turn past-due into first-paid

Items heading to collections, IRS debt and other equally immediate situations must be triaged first. Keep documentation on your progress and get written confirmation when an account is settled.

 

4.)    Save an emergency fund

Set aside an emergency fund of $1,000 before tackling remaining debt. That way, bumps in the road become annoyances rather than full-on detours. If you dip into your emergency fund, replace it. This safety net protects you from accruing new debt while you pay off your old debt.

 

5.)    Choose snowball or avalanche

Your personality type can help determine which paydown method suits you best. If you’re emotion-based, try the snowball. Logic-centric, go avalanche.

 

  • Debt snowball — Need to see fast results to stay on track? List debts from smallest to largest, regardless of interest rate. Pay off the smallest debt first while making only minimum payments on all larger debts. Once you’ve paid a debt off, put that same payback amount into the next larger, then the next, and so on, until you’ve crossed the biggest debt off your list — leaving you debt free.

 

  • Debt avalanche — Analytical above all else? Try this: List your debts by interest rate. Tackle the highest-rate debt first while paying minimums on the rest.

 

For example, let’s say you’ve earmarked $1,500 in your monthly budget for debt repayment and want to tackle three big bills:

–          $4,500 auto loan at 3.5%

–          $18,000 student loan at 4.25%

–          $16,000 credit card debt at 18.99%

 

The debt avalanche says you’d pay down the credit card first. Student loan second. Car loan third.

Choosing this method over the snowball would save on interest and get you out of debt sooner – assuming you follow through. But for many, the snowball’s quicker wins help build momentum, keeping them focused on the larger goal. Choose the way that works for you.

 

6.)    Sell unnecessary items

Ready to clean house? Declutter, and put a dent in debt, via digital yard sale groups or apps, like OfferUp. Upload pics of that old Dustbuster, winter coat, and couch. Then, apply the sale money to your next debt payment.

 

7.)    Snag a side-hustle

The most efficient way to knock out debt is simple: Pay more, faster. Fortunately, the gig economy is in full swing, and with it comes new, flexible ways to earn extra cash. Extroverted? Give Lyft or Uber a try. Prefer food? Explore grocery-based businesses like Instacart. Rather drive alone? See if Amazon needs help with package delivery. A small income spike can help get you closer to your debt-free goal. 

 

As you work to hang on to more of your money, remember that TaxAct helps you find every tax deduction and credit you’re owed. We can’t pay off your credit cards, but we can help you tackle tax season like a pro.

 

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